"Introduce 'Say on Pay' Allowing Shareholders to Decide Executive and Owner Salaries"

Capital Research Institute 'Executive Compensation Regulation System Improvement Plan' Seminar
Shareholders May Reject Executive Compensation Proposals
UK Companies Re-Disclose Reflecting Issues
Korea Must Apply to Both Owners and Management
Building Comparative Compensation Plans in the Same Industry Also Important

There has been a call to introduce the 'Say-On-Pay' system, where corporate executives' salaries (performance bonuses) are approved at shareholders' meetings, in South Korea. 'Say-On-Pay' was one of the systems reviewed last year by financial authorities during the process of reforming the performance compensation framework for financial companies. It is important to note that if introduced domestically, not only executives but also controlling shareholders (owner families) should be included in the scope.

On the 19th, the Korea Capital Market Institute held a seminar titled "Recent Trends in Executive Compensation and Improvement Measures for Regulatory Systems" at the Korea Financial Investment Association in Yeouido, Seoul, in collaboration with Korea University and the Corporate Governance Research Institute to discuss these issues. The seminar featured presentations by Professor Jae-Yong Shin from Seoul National University’s Business Administration Department, Research Fellow Hyun-Young Hwang from the Korea Capital Market Institute, and Professor Chang-Min Lee from Hanyang University’s Business Administration Department.

Professor Chang-Min Lee of Hanyang University’s Business School stated, "In Korea, shareholders’ rights regarding the determination of directors’ compensation are limited," adding, "Each company has different standards for executive performance compensation, including whether severance pay is included, which limits the rationality of compensation decisions." He advocated for the introduction of a Korean-style Say-On-Pay system.

Professor Lee explained that important considerations when introducing Say-On-Pay include △approval of fixed salaries △comparison with peer companies △and whether to apply it to controlling shareholders.

He said, "The UK has a 'fair pay' standard that ensures the increase rate of executives’ fixed salaries does not exceed that of all employees," adding, "However, since there is no issue with controlling shareholders, performance bonuses linked to stocks are given significantly based on ability."

Presentation material by Professor Lee Chang-min of Hanyang University Business School

He also pointed out that the criteria for determining fixed salaries should be made clearer. In Korea, standards vary by company. Advanced countries such as the US and the UK determine compensation based on a 'peer group,' comparing averages of companies in the same industry or those in the Standard & Poor’s (S&P) 500.

Above all, he emphasized that the salaries of controlling shareholders (owner families) should also be approved through Say-On-Pay. Professor Lee said, "The purpose of stock-based compensation (performance bonuses) is to attract and retain talented individuals in the company as an incentive system," adding, "There is no need to provide such incentives to controlling shareholders." From the company’s perspective, stock compensation and other performance bonuses are costly compensation systems. Considering the purpose of performance compensation systems, excessive performance bonuses for controlling shareholders who effectively hold management rights are inappropriate.

Say-On-Pay is a system where shareholders vote on past compensation levels and specific future compensation policies at shareholders’ meetings. It was first implemented in the UK in 2003. Directors’ compensation policies must be approved by shareholders before execution, and shareholder resolutions on compensation policies are made at least every three years.

In Korea, Article 388 of the Commercial Act states, "If the amount of directors’ compensation is not specified in the articles of incorporation, it shall be determined by resolution of the shareholders’ meeting." However, only the total limit of directors’ compensation is approved at the shareholders’ meeting and disclosed annually. Although disclosed annually, the information made public is limited, and compensation standards vary by company.

Research Fellow Hyun-Young Hwang of the Korea Capital Market Institute also said, "Compared to major foreign countries, Korean listed companies have limited shareholder approval rights regarding executive compensation. It is necessary to allow shareholders’ meetings to resolve not only the total limit of directors’ compensation but also specific details such as compensation calculation standards."

Research Fellow Hwang also criticized the domestic practice where the business report disclosing the criteria and basis for calculating directors’ compensation is released only one week before the shareholders’ meeting. He said, "Foreign institutional investors, who must exercise voting rights 10 days before the shareholders’ meeting, have to vote without reviewing the business report," adding, "The system should be improved so that the criteria and basis for directors’ compensation are disclosed at the time of the shareholders’ meeting notice or earlier."

Professor Jae-Yong Shin of Seoul National University’s Business School said, "US companies consider two main purposes for executive compensation: 'reward for performance achievement' and 'talent acquisition,'" pointing out, "Domestic companies focus on cash-based performance tied to short-term financial results rather than preemptive motivation." He further emphasized, "Stock-based compensation such as stock options should be disclosed based on fair value."